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The Cost of Being Unbanked: Hundreds of Dollars a Year, always one step further
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The Price of Not Being Banked is Hundreds of Dollars per Year, always one step further
Written by Tony Armstrong Lead Assigning Editor | Banking Tony Armstrong leads the banking team at NerdWallet. He has covered personal finance for more than 10 years. Tony started his career at NerdWallet as a writer , and progressed to the position of assistant assigning editor, and then to the position of lead assigning editor. His writing has been highlighted in the Los Angeles Times, MarketWatch, Mashable, Nasdaq.com, USA Today and VentureBeat. Tony is a resident of Minneapolis, Minnesota.
Updated Sep 13, 2016
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Banks may bring about a fair amount of problems, but the lack of access to a bank can be even more detrimental to your financial wellbeing. Without access to an institution offering basic services such as free check cashing and loans that have reasonable interest rates Consumers who are not banked rely on expensive alternative financial-service providers to cash checks and send payments on money-orders. These fees can cost households hundreds of dollars per year.
On top of the high day-to-day costs being a member of an institution like a credit union or bank can have negative long-term consequences. Unbanked households, which the FDIC defines as households that don't have an account at an insured institution, cannot save money to create emergency funds. They also can't switch to tools that save time for transactions like making payments or transfer money.
"The bank system that is traditional remains far from the reach of thousands of Americans," says Sean McQuay NerdWallet's banking experts and expert on credit. "While it may seem like a daunting task, using a bank account can be the first step towards breaking your cycle of going from from paycheck to paycheck, and thus pave the way for financial freedom."
The majority of households that do not have a bank account say the main reason is that they don't have enough money. The median post-tax income of such households is just $18,203, according NerdWallet's analysis based on data taken from the Federal Deposit Insurance Corp. The high cost of alternatives to traditional financial services only makes the situation even more expensive.
However, there are cheaper options available and taking advantage of them can help people reduce unnecessary expenses.
The key results
The annual average cost of not having a bank account is $196.50 for people who use an prepaid debit card that features direct deposit. This figure increases to $497.33 when the card doesn't allow direct deposit.
People who deal only with cash have annual costs of $198.83 for cashing checks and money order services.
With a total of 9 million unbanked households in the United States, down from 9.5 million in 2013, the total annual cost to these families ranges from $1.8 billion and $4.5 billion.
The absence of a bank account forces people to make use of alternative financial services. those who do not have a bank account are around 6-fold more likely use costly .
Transacting off grid is costly
"In many respects it is possible to compare the needs of unbanked households with those of banked households," says John Thompson the senior vice president of the Center for Financial Services Innovation an independent consultancy firm for financial services. Certain transactions must take place, but for unbanked consumers these transactions don't occur through the bank, Thompson says. This is where they become expensive.
Consider cashing a check as an example. If it's done through a bank or credit union, the task is as simple as it is affordable. However, that convenience is lost when you aren't a member of the traditional financial institution and alternatives could be a hefty price.
Check-cashing firms generally charge between 1% and 10% of a check's value and this means that consumers who don't use the prepaid cards that offer direct deposit will pay the equivalent of $182.03 per year to access their money as per NerdWallet's study of FDIC information and using a fee of 1percent of the check's value. People who don't have bank accounts are six times more likely use check-cashing services than people who do.
"Relying on services such as cashing checks and money orders is expensive and it's the Americans who can't afford the cost and inconvenience who find themselves without bank accounts," McQuay says.
Instead for checking account, many people utilize debit cards that are prepaid. These can be found at grocery stores and other retailers like Target, Walgreens and Wal-Mart. This kind of plastic is relatively simple to use: Users are able to spend only the amount of money they have loaded into the card.
Costs of checking accounts
These accounts, with lower overdraft fees and free monthly fees, will charge customers about $30 annually. Checking accounts on average costs customers approximately $150 annually with the monthly maintenance fees as well as two overdraft fees.
" Having to rely on services like cashier's checks and money orders is costly, and it's the Americans who are the least able to pay these costs and hassles who have to be without banking. " Sean McQuay , NerdWallet banking and credit expert
However, prepaid cards tend to be more costly than standard checking accounts, which cost users an average of $179.70 or $298.50 annually, based on whether the card is equipped with the option of direct deposit for free. If it does not, cardholders face steep cash-loading fees. Also, prepaid cards typically have either monthly fees or per-transaction costs and ATM withdrawal charges.
A person who uses neither a checking account nor a prepaid card faces average annual charges of $198.83 for check cashing as well as money-order services.
Along with their expenses Prepaid cards also aren't without their flaws. People can't use them to build credit, and federal law doesn't require prepaid cards to provide protection against fraud, like they do for regular debit cards. But, the networks such as American Express, Discover, MasterCard and Visa generally offer a certain amount of protection for purchases but they don't offer protection for ATM as well as some online transactions.
Furthermore, the majority of checking accounts are insured by the government, which means that the account holders will not lose any money, up to $250,000, if the bank went under. The people who use prepaid debit cards get this kind of protection in the event that they're made by a banking institution however, even if they do it's possible that they won't get all of their money back. If they purchased their credit card from a company that isn't covered by the FDIC and this is not uncommon, the issuer's rules determine the level of protection they offer and whether they'll be paid back.
Indirect costs are a major factor, too
The downsides of not having a bank account go beyond the expensive costs of other financial services. One of the biggest disadvantages is that not being a member to a bank takes extra time. Consumers who aren't banked and don't have credit cards with a prepaid option don't have access to the numerous advantages of online and mobile banking, for example, automatic bill payments and free money-transfer services. Prepaid cards may come with these options however they aren't available for free, as are those provided by banks and credit unions.
"If you aren't a member of an institution that offers financial services, you can't bank on your time," Thompson says, noting that this could force people to be absent from work, which could affect their pay. If people have to travel to take care of financial obligations that require transportation, they'll incur expenses as well, Thompson says.
Not being able to use the standard banking services can hurt people in different ways, as well. The bank provides access to tools to assist them in maintaining or improving their overall financial condition, like certificates of deposit, secure credit cards. These can, for example, help them create an emergency fund and build credit, which decreases the requirement for expensive payday loans.
The average of the amount borrowed through payday lenders is just $350 as per a report the report. This is a figure that those who are members of a bank or credit union could accumulate using a savings account or use a secured credit card to pay for. This would enable them to avoid the risk of taking out loans, which have average interest rates of about .
With savings accounts and secured cards, it is easy to maintain a healthy credit score. And the costs of borrowing are much less; the most popular secured credit cards generally have interest rates at around 20%.
"We have systems that let us create information about past credit habits," says Gregory B. Fairchild, associate professor of business administration of the University of Virginia Darden School of Business. "Absent this data, the very real cost for people is that they're always at risk."
"Everyone's a risk," he says, but the risk for people without credit histories "is highly uncertain."
The risk of a lapse in judgement can cause an impact that can trickle down into different areas of people's lives which could affect their ability to get loans credit cards, take out loans or even begin an enterprise.
Without a credit history small business owners are less likely to get credit lines, according to Tara Robinson, chief development officer at Mission Asset Fund, a non-profit that offers loans along with other types of financial services to previously unserved families. The absence of a credit history is a factor that can restrict the potential of earning, she says.
"You kind of get stuck before you even begin," Robinson says.
Better options for unbanked consumers
If you do not have a bank account, it may seem as if expensive alternative financial services are your only choices. However, this isn't the scenario. Here are a few strategies that are worth considering.
Take advantage of second-chance checking If you've experienced an account closed or a check bounced, or you closed an account before paying a bank charge, you could be listed on , a consumer reporting agency. A negative file is often all it takes to get banks to deny your application for a new account.
But some financial institutions offer second-chance checking accounts. They eliminate the requirement to use check-cashing services and money orders, the latter of which cost unbanked consumers about $17 annually. The products are accessible to people listed in ChexSystems and are able to be used to re-establish the integrity of your banking records. If you've accomplished that, think about opening an account for savings to help you build and manage your emergency funds. For opening either account, you'll need present proof of identity and be required to deposit an initial sum that ranges from $10 to $100.
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Secure your credit card: With secured cards, you put down the amount, typically at least $300 or $200, which you can then borrow against. Once you've used your secured card for a period of about one year, you might be offered an upgrade to a regular credit card.
In addition is that you'll have improved your credit score during the process, which makes you more attractive to lenders. This is assuming you can prove that you make your monthly installments on time and fully.
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Join a lending circle or work with a small community lender The process of borrowing money and paying it back punctually improves your credit rating, and borrowing traditional loans from banks and credit unions isn't your only option. Mission Asset Fund, Robinson's employer, oversees and manages lending circles, which provide a special type of zero-interest loan.
"Each loan is typically around 1,000 dollars," Robinson says. "You are a group of 10 people who come together and put in $100 every month, with one person getting the loan each month. The loan is distributed until everyone is able to get the loan."
Like many organizations that supervise lending circles, Mission Asset reports repayment behaviour to credit bureaus on a monthly basis. For those with poor credit, who pay punctually can raise their scores to about 650 after only 6 months Robinson says.
"It's the perfect opportunity to allow those who don't have credit scores to build credit fast and for those with damaged scores to help start to rebuild them using an unsecured line of credit," she adds.
Check to see if there's a local community lender or a non-profit within your town that offers the types of loans or similar financial services.
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Joining the financial mainstream
From checking out checks to using saving accounts to deposit checks, reasons people use banks might not be appealing. However, in the end banks are crucial elements in families their financial lives. If you don't have access to a bank to manage your finances, managing your financial obligations can be difficult and most likely to be more costly.
This is what makes second-chance check accounts, secured credit cards, community lenders and lending circles extremely valuable. They give families access to financial services that they could otherwise miss out on, thus paving the way for a more secure financial future.
NerdWallet analysts of data Sreekar Jasthi and writer Spencer Tierney were the authors of this study.
METRODOLOGY
To calculate the average income for households with no bank accounts We used data taken from 2015's FDIC Nationwide Survey of Underbanked and Unbanked Households. It was found that 7percent of households had no bank accounts. To calculate the cost of cashing checks for those who are unbanked and who use prepaid debit cards that do not require direct deposit or for those with cash only We assumed two paychecks that were cashed each month, and a 1% fee of the total amount of the check. We also assumed that one money order is that is sent each month, and an average fee of $1.40.
For banking costs associated with using a NerdWallet-recommended checking account, we assumed two overdrafts per year costing $15 each and no other fees. For the typical check account we assumed two overdrafts per year with a cost of $30 each and the maintenance fee of $7.50 each month. To determine the average cashing of checks and money order fees We used the FDIC's data regarding the frequency of alternative financial services used by each type of household (banked or not banked) Then, we applied the lower frequency of use among banked households to the average costs.
To determine the average annual cost of prepaid debit cards, we examined 69 cards, which were based on major issuersand high searches, Pew Charitable Trust's and the cards listed on the websites of and. For cards that offer several plans, we included each plan as a distinct card.
The analysis covers the annual costs associated with the prepaid debit card that comes with and without direct deposit for payroll. The median monthly fee was $4.98 and the median out-of-network ATM fee used was $2.50. We employed the maximum cash load fee of $4.95.
In the case of direct deposit we assumed that there would be 12 monthly fees and two out-of-network ATM charges per month. In the case of the non-direct deposit option we assumed 12 month fees and the four ATM fees per month, plus two cash-load charges each month. Signature-based and PIN-based transaction fees are typically not applicable to cards that have monthly fees, therefore they weren't included.
About the author: Tony Armstrong is a banking editor at NerdWallet. His work has been featured by the Los Angeles Times, Mashable and USA Today.
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